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Op-Ed: Rule Change Is PPIP's Best Friend


FASB shift is huge positive for markets in the short and medium term.

Editor's Note: As an emerging-markets banking analyst, James Kostohryz has firsthand experience of banking collapses and their subsequent resolutions in Mexico, Argentina and Southeast Asia. Since leaving his position as Head of International Investments at Brazil's Banco Pactual in 2000, James has worked as an independent trader and investor.

The following was posted in real time on our premium Buzz & Banter. It's being shared here for the benefit of the Minyanville community.

There's been a great deal of talk throughout the markets about how the FASB rule change somehow torpedoes the Geithner plan. I disagree. I see them as entirely compatible - indeed, as complementary.

The purpose of the Geithner plan could not be and cannot be to encourage a distressed market in which hedge funds enrich themselves by buying bank assets at below fair value, thereby destroying the banking system in the process.

The FASB change simply means that banks will not be forced to sell under distressed conditions. Buyers and sellers will value the assets for their true worth, and bids/ asks will be placed.

The fact of the matter is that the fair value models that the banks will use and that the hedge funds will use to value the assets will not differ substantially. Thus, the bid/ ask prices will tend to converge, and a market will be formed.

In particular, a market will be formed with a bias on the bid side, because of cheap financing and the incredible guarantees the government is giving the hedge funds.

Many originally criticized the Geithner plan as inadequate to cover all the assets out there. Well, it was never meant to cover all the assets out there. It would be absurd to expect that all current holders of the "toxic" assets would be selling them at distressed prices. And certainly, with the FASB rule change, only a percentage of the assets will come into play. The Geithner plan is plenty large to create a market for the marginal assets that players want to exchange for cash in search of other opportunities.

I think all this talk about contradiction is mainly driven by an inclination by many to see the potential negative in everything. Skepticism and even fear are understandable, especially in this environment, and it is always good to look at both sides of the trade.

However, in this case, I think that that both the FASB rule changes and the Geithner plans are huge positives for the banks and for the markets in the short and medium term. (For ways to invest, consider potential beneficiaries: Financial ETFs like XLF, UYG, FAS, or firms like Citigroup (C), Wells Fargo (WFC), JPMorgan (JPM), Bank of America (BAC), Goldman Sachs (GS) or Morgan Stanley (MS).

The only real downside here is long term: The moral hazard and the massive wealth transfer from taxpayers to bankers. But that's a story for another day.

For now, I think people need to rid themselves of the tendency to equivocate and see this for what it is: A huge positive for the markets in the short and medium term.
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